CITY OF MILWAUKEE – WATER WORKS Milwaukee, Wisconsin

COMMUNICATION TO THOSE CHARGED WITH GOVERNANCE AND MANAGEMENT

As of and for the Year Ended December 31, 2018

CITY OF MILWAUKEE – WATER WORKS

TABLE OF CONTENTS Page No. Required Communication of Internal Control Related Matters Identified in the Audit to Those Charged with Governance 1 Other Communications to Those Charged with Governance Two Way Communication Regarding Your Audit 2 – 3 Communication of Recommendations and Informational Points 4 – 6 Required Communications by the Auditor to Those Charged with Governance 7 – 9 Summary of Uncorrected Financial Statement Misstatements Management Representations

REQUIRED COMMUNICATION OF INTERNAL CONTROL RELATED MATTERS IDENTIFIED IN THE AUDIT TO THOSE CHARGED WITH GOVERNANCE

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To the Common Council Milwaukee Water Works Milwaukee, Wisconsin

In planning and performing our audit of the financial statements of the Milwaukee Water Works as of and for the year ended December 31, 2018, in accordance with auditing standards generally accepted in the United States of America, we considered its internal control over financial reporting (internal control) as a basis for designing our auditing procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of its internal control. Accordingly, we do not express an opinion on the effectiveness of its internal control.

A separate Report on Internal Control for the City of Milwaukee was issued to the Common Council. The information contained in that report is not included with this report.

A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected, on a timely basis. We did not identify any deficiencies in internal control that we consider to be material weaknesses.

Our consideration of internal control was for the limited purpose described in the first paragraph and was not designed to identify all deficiencies in internal control that might be material weaknesses. Given these limitations during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified.

This communication is intended solely for the information and use of management, those charged with governance, and others within the organization and is not intended to be, and should not be, used by anyone other than these specified parties.

Milwaukee, Wisconsin July 24, 2019

Baker Tilly Virchow Krause, LLP trading as Baker Tilly is a member of the global network of Baker Tilly International Ltd., the members of which are separate and independent legal entities. © 2018 Baker Tilly Virchow Krause, LLP

OTHER COMMUNICATIONS TO THOSE CHARGED WITH GOVERNANCE

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TWO WAY COMMUNICATION REGARDING YOUR AUDIT As part of our audit of your financial statements, we are providing communications to you throughout the audit process. Auditing requirements provide for two way communication and are important in assisting the auditor and you with more information relevant to the audit. As this past audit is concluded, we use what we have learned to begin the planning process for next year’s audit. It is important that you understand the following points about the scope and timing of our next audit:

a. We address the significant risks of material misstatement, whether due to fraud or error, through our detailed audit procedures.

b. We will obtain an understanding of the five components of internal control sufficient to assess the risk of material misstatement of the financial statements whether due to error or fraud, and to design the nature, timing, and extent of further audit procedures. We will obtain a sufficient understanding by performing risk assessment procedures to evaluate the design of controls relevant to an audit of financial statements and to determine whether they have been implemented. We will use such knowledge to: > Identify types of potential misstatements. > Consider factors that affect the risks of material misstatement. > Design tests of controls, when applicable, and substantive procedures.

We will not express an opinion on the effectiveness of internal control over financial reporting or compliance with laws, regulations, and provisions of contracts or grant programs.

c. The concept of materiality recognizes that some matters, either individually or in the aggregate, are important for fair presentation of financial statements in conformity with generally accepted accounting principles while other matters are not important. In performing the audit, we are concerned with matters that, either individually or in the aggregate, could be material to the financial statements. Our responsibility is to plan and perform the audit to obtain reasonable assurance that material misstatements, whether caused by errors or fraud, are detected.

We are very interested in your views regarding certain matters. Those matters are listed here:

a. We typically will communicate with your top level of management unless you tell us otherwise.

b. We understand that the Common Council has the responsibility to oversee the strategic direction

of your organization, as well as the overall accountability of the entity. Management has the responsibility for achieving the objectives of the entity.

c. We need to know your views about your organization’s objectives and strategies, and the related business risks that may result in material misstatements.

d. Which matters do you consider warrant particular attention during the audit, and are there any areas where you request additional procedures to be undertaken?

e. Have you had any significant communications with regulators or grantor agencies?

f. Are there other matters that you believe are relevant to the audit of the financial statements or the federal or state awards?

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TWO WAY COMMUNICATION REGARDING YOUR AUDIT (cont.)

Also, is there anything that we need to know about the attitudes, awareness, and actions of the Milwaukee Water Works (the “Utility") concerning:

a. The Utility’s internal control and its importance in the entity, including how those charged with governance oversee the effectiveness of internal control?

b. The detection or the possibility of fraud? We also need to know if you have taken actions in response to developments in financial reporting, laws, accounting standards, governance practices, or other related matters, or in response to previous communications with us. With regard to the timing of our audit, here is some general information. If necessary, we may perform preliminary financial audit work during the months of October-December, and sometimes early January. Our final financial fieldwork is scheduled during the spring to best coincide with your readiness and report deadlines. After fieldwork, we wrap up our financial audit procedures at our office and review the draft financial statements prepared by management. Final copies of our report and other communications are issued after approval by your staff. This is typically 6-12 weeks after final fieldwork, but may vary depending on a number of factors. Keep in mind that while this communication may assist us with planning the scope and timing of the audit, it does not change the auditor’s sole responsibility to determine the overall audit strategy and the audit plan, including the nature, timing, and extent of procedures necessary to obtain sufficient appropriate audit evidence. We realize that you may have questions on what this all means, or wish to provide other feedback. We welcome the opportunity to hear from you.

COMMUNICATION OF RECOMMENDATIONS AND INFORMATIONAL POINTS

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PROFESSIONAL STANDARDS UPDATE / INFORMATIONAL POINTS

GASB UPDATES

The Government Accounting Standard Board (GASB) has been very active in recent years, issuing new standards at a fast pace. Over the next few years, your government will have many new standards to evaluate and implement. Here are the standards which may impact you in the next year:

GASB 84 improves guidance regarding the identification of fiduciary activities and how they should be reported, effective for reporting periods beginning on or after December 15, 2018

GASB 88 improves certain disclosures related to debt, including direct borrowings and placements, effective for reporting periods beginning on or after June 15, 2018

Other GASB pronouncements on the horizon, while the implementation dates is in the near term these are anticipated to have significant impacts on many government financial statements:

GASB 87 improves accounting and financial reporting for leases, effective for reporting periods beginning on or after December 15, 2019

GASB 89 provides guidance for accounting for interest cost incurred before the end of a constriction period, effective for reporting periods beginning on or after December 15, 2019

Looking even further ahead, the Technical Agenda, below, outlines significant areas GASB is currently working on:

Conceptual Framework Disclosure Recognition

Major Projects Financial Reporting Model Revenue and Expense Recognition Public-Private Partnerships

Practice Issues Conduit Debt Deferred Compensation Plans Secured Overnight Financing Rate Subscription-Based IT arrangements Implementation Guidance

Pre-Agenda Research Going Concern Compensated Absences Prior-Period Adjustments, Accounting Changes and Error Corrections

Through our firm involvement on AICPA committees, Baker Tilly follows these developments closely so that we can help you prepare for the changes as they evolve. This participation also allows us to share with GASB the experiences and perspectives of our clients to potentially influence the direction of future projects. Full lists of projects, as well as many resources, are available on GASB’s website which is located at www.gasb.org.

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PROFESSIONAL STANDARDS UPDATE / INFORMATIONAL POINTS (cont.)

INTERPRETING YOUR FINANCIAL STATEMENTS POST-GASB NO. 75

During the current year, your government implemented GASB Statement No. 75, which required employers providing other post-employment benefits (OPEBs) to report the OPEB liability in their government-wide and proprietary fund financial statements. This standard is intended to parallel GASB Statements No. 68 and 73 for pensions, which together provide for more overall consistency and comprehensive guidance for pensions and other post-employment benefits. Previously, your government only reported an OPEB liability to the extent that annual contributions fell short of (or exceeded) the actuarially estimated annual OPEB cost. In addition, the actuarially estimated annual OPEB cost included a mechanism to recognize the initial OPEB liability at the implementation of GASB Statement No. 45 over an extended period of years. Under the new standard your government is required to report the total OPEB liability as determined by the actuary. There are also OPEB-related deferred outflows and/or inflows due to the timing of benefit payments and to allow for smoothing of activity. As of the December 31, 2018 measurement date used for your December 31, 2018 financial statements, the utility’s share of the actuarially determined OPEB liability for your single employer plan is $47,020,734 and is reported as a noncurrent liability. OPEB activity under GASB Statement No. 75 is reported in the proprietary fund financial statements, similar to long-term debt. The implementation of this new standard does not require changes to how you pay for or fund your OPEB benefits. The accounting and reporting for other post-employment benefits has become more complex with the implementation of GASB Statement No. 75. We are available to answer questions on how this new accounting standard affects your financial statements. In June 2017, GASB issued new guidance to establish a single model for lease accounting based on the foundational principle that leases are financings of the right to use an underlying asset. This standard is effective for fiscal years ending on or after December 31, 2020. Statement No. 87, Leases, requires recognition of certain lease assets and liabilities for leases that were previously classified as operating leases and recognize as inflows of resources or outflow of resources based on the payment provisions of the contract. Under the new standard, a lease is defined as a contract that conveys control of the right to use another entity’s nonfinancial asset (underlying asset) as specified in the contract for a period of time in an exchange or exchange-like transaction. Control is defined by 1) the right to obtain the present service capacity from the use of the underlying asset and 2) the right to determine the nature and manner of use of the underlying asset. Any contract that meets this definition should be accounted for under the lease guidance, unless specifically excluded in this statement. Leases include contracts that, although not explicitly identified as leases, meet the above definition of a lease. There are some exemptions outlined in the standard including, intangible assets, service concession arrangements and supply contracts.

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PROFESSIONAL STANDARDS UPDATE / INFORMATIONAL POINTS (cont.)

UPCOMING LEASE STANDARD

In June 2017, the Governmental Accounting Standards Board (GASB) issued new guidance to establish a single model for lease accounting based on the foundational principle that leases are financings of the right to use an underlying asset. This standard is effective for fiscal years ending on or after December 31, 2020. Statement No. 87, Leases, requires recognition of certain lease assets and liabilities for leases that were previously classified as operating leases and recognize as inflows of resources or outflow of resources based on the payment provisions of the contract. Under the new standard, a lease is defined as a contract that conveys control of the right to use another entity’s nonfinancial asset (underlying asset) as specified in the contract for a period of time in an exchange or exchange-like transaction. Control is defined by: 1) the right to obtain the present service capacity from the use of the underlying asset and 2) the right to determine the nature and manner of use of the underlying asset. Any contract that meets this definition should be accounted for under the lease guidance, unless specifically excluded in this statement. Leases include contracts that, although not explicitly identified as leases, meet the above definition of a lease. There are some exemptions outlined in the standard including, intangible assets, service concession arrangements and supply contracts. We recommend the Utility review this standard and start planning how this will affect your financial reporting. An inventory of all contracts that might meet the definition of a lease should be started. The contract listing should include key terms of the contracts such as:

Description of contract

Underlying asset

Contract term

Options for extensions and terminations

Service components, if any

Dollar amount of lease In addition, the Utility should begin to establish a lease policy to address the treatment of common lease types, including a dollar threshold for each lease. We are available to discuss this further and help you develop an action plan.

REQUIRED COMMUNICATIONS BY THE AUDITOR TO THOSE CHARGED WITH GOVERNANCE

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To the Common Council Milwaukee Water Works Milwaukee, Wisconsin Thank you for using Baker Tilly Virchow Krause, LLP as your auditor. We have completed our audit of the financial statements of the Milwaukee Water Works (the “Utility”) for the year ended December 31, 2018, and have issued our report thereon dated July 24, 2019. This letter presents communications required by our professional standards.

OUR RESPONSIBILITY UNDER AUDITING STANDARDS GENERALLY ACCEPTED IN THE UNITED STATES OF AMERICA

AND GOVERNMENT AUDITING STANDARDS The objective of a financial statement audit is the expression of opinions on the financial statements. We conducted the audit in accordance with auditing standards generally accepted in the United States of America and Government Auditing Standards. These standards require that we plan and perform our audit to obtain reasonable, rather than absolute, assurance about whether the financial statements prepared by management with your oversight are free of material misstatement, whether caused by error or fraud. Our audit included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit does not relieve management or the common council of their responsibilities. As part of the audit we obtained an understanding of the entity and its environment, including internal control, sufficient to assess the risk of material misstatement of the financial statements and to design the nature, timing and extent of further audit procedures. The audit was not designed to provide assurance on internal control or to identify deficiencies in internal control. OTHER INFORMATION IN DOCUMENTS CONTAINING AUDITED FINANCIAL STATEMENTS Our responsibility does not extend beyond the audited financial statements identified in this report. We do not have any obligation to and have not performed any procedures to corroborate other information contained in client prepared documents, such as official statements related to debt issues. PLANNED SCOPE AND TIMING OF THE AUDIT We performed the audit according to the planned scope and timing previously communicated to you in our meeting about planning matters on November 1, 2018.

Baker Tilly Virchow Krause, LLP trading as Baker Tilly is a member of the global network of Baker Tilly International Ltd., the members of which are separate and independent legal entities. © 2018 Baker Tilly Virchow Krause, LLP

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QUALITATIVE ASPECTS OF THE ENTITY’S SIGNIFICANT ACCOUNTING PRACTICES Accounting Policies

Management is responsible for the selection and use of appropriate accounting policies. In accordance with the terms of our engagement letter, we will advise management about the appropriateness of accounting policies and their application. The significant accounting policies used by the Utility are described in Note 1 to the financial statements. As described in Note 1, the Utility changed accounting policies related to Other Post Employment Benefits by adopting GASB issued Statement No. 75 - Accounting and Financial Reporting for Postemployment Benefits Other than Pensions in 2018. We noted no transactions entered into by the utilities during the year that were both significant and unusual, and of which, under professional standards, we are required to inform you, or transactions for which there is a lack of authoritative guidance or consensus. Accounting Estimates

Accounting estimates are an integral part of the financial statements prepared by management and are based on management's knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected. The most sensitive estimates affecting the financial statements were:

Management’s estimate of the total OPEB liability is based on an actuarial report completed by GRS Consulting. We evaluated the key factors and assumptions used by the actuaries in determining that they are reasonable in relation to the financial statements taken as a whole.

Management’s estimate of the net pension liability is based on an actuarial report completed by Conduent HR Consulting. We evaluated the key factors and assumptions used by the actuaries in determining that they are reasonable in relation to the financial statements taken as a whole.

Management's estimate of unbilled revenues is based on units of consumption used by customers but not yet billed through the normal billing process. We evaluated the key factors and assumptions used to develop this estimate in determining that it is reasonable in relation to the financial statements taken as a whole.

Financial Statement Disclosures

The disclosures in the financial statements are neutral, consistent, and clear. DIFFICULTIES ENCOUNTERED IN PERFORMING THE AUDIT We encountered no significant difficulties in dealing with management in performing our audit. CORRECTED AND UNCORRECTED MISSTATEMENTS Professional standards require us to accumulate all known and likely misstatements identified during the audit, other than those that are trivial, and communicate them to the appropriate level of management. A summary of uncorrected financial statement misstatements has been provided to you. Management has determined that their effects are immaterial, both individually and in the aggregate, to the financial statements taken as a whole. DISAGREEMENTS WITH MANAGEMENT For purposes of this letter, professional standards define a disagreement with management as a matter, whether or not resolved to our satisfaction, concerning a financial accounting, reporting, or auditing matter that could be significant to the financial statements or the auditor’s report. We are pleased to report that no such disagreements arose during the course of our audit.

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CONSULTATIONS WITH OTHER INDEPENDENT ACCOUNTANTS In some cases, management may decide to consult with other accountants about auditing and accounting matters. If a consultation involves application of an accounting principle to the governmental unit’s financial statements or a determination of the type of auditors’ opinion that may be expressed on those statements, our professional standards require the consulting accountant to check with us to determine that the consultant has all the relevant facts. To our knowledge, there were no such consultations with other accountants. MANAGEMENT REPRESENTATIONS We have requested certain representations from management that are included in the management representation letter. This letter follows this required communication. SIGNIFICANT ISSUES Professional standards require us to communicate any significant issues that were discussed, or were the subject of correspondence with management. There were no additional communications or correspondence with management that have not been disclosed in this letter. INDEPENDENCE We are not aware of any relationships between Baker Tilly Virchow Krause, LLP and the MMSD that, in our professional judgment, may reasonably be thought to bear on our independence. Relating to our audit of the financial statements of the Utility for the year ended December 31, 2018, Baker Tilly Virchow Krause, LLP hereby confirms that we are, in our professional judgment, independent with respect to the Utility in accordance with the Code of Professional Conduct issued by the American Institute of Certified Public Accountants. We provided no services to the Utility other than the audit services provided in connection with the audit of the current year’s financial statements.

OTHER AUDIT ISSUES We generally discuss a variety of matters, including the application of accounting principles and auditing standards, with management each year prior to retention as the Utility’s auditors. However, these discussions occurred in the normal course of our professional relationship and our responses were not a condition to our retention. OTHER MATTERS We applied certain limited procedures to the required supplementary information (RSI) that supplements the financial statements. Our procedures consisted of inquiries of management regarding the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the financial statements, and other knowledge we obtained during our audit of the financial statements. We did not audit the RSI and do not express an opinion or provide any assurance on the RSI. This information is intended solely for the information and use of the Common Council and management of the Utility and is not intended to be and should not be used by anyone other than these specified parties. We welcome the opportunity to discuss the information included in this letter and any other matters. Thank you for allowing us to serve you.

Milwaukee, Wisconsin July 24, 2019

SUMMARY OF UNCORRECTED FINANCIAL STATEMENT MISSTATEMENTS

Total Total Change inCurrent Noncurrent Total Assets/ Current Noncurrent Total Liabilities/ Net Position/ Total Expenses/ Net Position/Assets Assets Deferred Outflows Liabilities Liabilities Deferred Inflows Fund Balances Revenues Expenditures Fund Balances

Milwaukee Water Works - - - (84,223) - (84,223) 84,223 - 84,223 84,223

MILWAUKEE WATER WORKSSUMMARY OF UNCORRECTED FINANCIAL STATEMENT MISSTATEMENTS

December 31, 2018

Financial Statements Effect -Debit (Credit) to Financial Statement Total

MANAGEMENT REPRESENTATIONS